The RBA paused. Thank God.
So the RBA finally cut us some slack.
Yesterday, it left rates on hold, sparing us another rate hike.
But it’s been one heck of a ride. From the lowest rates on record to the highest rates since 2012 in just over a year, it’s been enough to give you whiplash.
And burn a hole in your bank balance.
But the RBA was keen to stress that they’re not necessarily done. They’re going to take a breather and see how things are evolving, but it looks like they still think at least one or two hikes are probably necessary.
And markets agree, with bond prices reflecting at least one more hike before the year’s out.
But for now, the bitter medicine of rate hikes seems to be working.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Governor Lowe said.
“In light of this and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady this month.”
But!
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Dr Lowe said.
Inflation is certainly moving in direction.
Last month we learnt that the headline inflation rate fell to 5.6%, down from 6.8% in April.
It’s now looking pretty clear that the worst of inflation is behind us.
But even at 5.6%, we’re still a long way north of the RBA’s 2-3% target band.
I mean, inflation is literally twice as high as it needs to be!
And it’s not a given that inflation will just obediently go back in its box from here. It’s been decades since we’ve had to do something like that. How does inflation fall in a post-Facebook economy?
That said, I think the rate hikes we’ve had should get us pretty close.
My uber driver was complaining about rates the other day, which is a sign that the pain of rate hikes is now widespread and seriously being felt. But seriously, it’s becoming a hot topic, which is how you now the hikes are having their desired effect.
And there’s still the fixed-rate reset to be digested. A lot of people took out fixed rate loans and super low rates during Covid. They’re now rolling over, which means there’s extra tightening coming through the system, regardless of what the RBA does over the next six months.
And as that lands, the demand side of the economy should slow even further, which should finish the job on inflation.
But there is still a lot of uncertainty here.
My planning right now factors in at least three or four more rate hikes over the next twelve months, just to be safe.
I don’t think we’ll get there, but I’d rather be safe than sorry.
These are still unpredictable times.